The atrocious British weather this winter has brought them all out again, brandishing the same old fallacies.

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In the blue corner are the climate change deniers, pouring scorn on the idea that the floods afflicting the UK have anything to do with climate change. No, they are just perfectly normal variations in the weather.
When the chief scientist at the Met Office suggested – in the sort of cautious terms that only an academic uses – that there might be evidence of a potential connection with global warming, the response of Lord Lawson of Blaby, a former Chancellor of the Exchequer, was withering: “…this Julia Slingo woman, who made this absurd statement…”. Ouch.

What the Met Office understands, but the deniers apparently do not, is that the climate is a complex, non-linear system. You will never be able to draw an unambiguous chain of cause and effect from the emissions of a coal-fired power station to the flooded Somerset Levels. That is why the scientists do not make such claims. But the lazy response of the deniers is to demand that they do.

Multiple outcomes

Complex systems have multiple inputs which interact to create multiple outcomes. Change one of those inputs and you are likely to have different outcomes. Our oxygen-rich atmosphere has been created by billions of years of biological processes that have buried carbon underground. Digging it up and burning it has consequences, even if we can’t calculate them with precision. This is what Dame Julia Slingo meant, and she was right.

But if the arguments of the climate change deniers are naïve and fallacious, the debate in the red corner is equally depressing. There is too much focus, we hear, on short-term financial returns at the expense of long-term sustainability. Gross domestic product should no longer be a purely financial measure. Investors need to factor environmental, social and governance considerations into their decisions as well as financial returns. This requires a new type of capitalism.

That is not going to happen, of course. But there is also a fallacy at the heart of the case, which is to misunderstand what capitalism is. It is a mechanism, not an ideology. People respond to incentives, particularly financial ones. To deny the central importance of financial return is like calling for the laws of physics to be changed so that a ball thrown in the air does not come down again.

While neither the climate change deniers nor the ESG brigade have the answer, both have a point of sorts. The deniers are right that we do not know with certainty what will be the result of any given level of carbon emissions (though as an excuse for inaction it is reckless in the extreme). And the champions of ESG are right in one sense about short-termism. As a recent paper from Carbon Tracker and the London School of Economics has pointed out, the combined balance sheets of fossil fuel companies implicitly assume that far more carbon reserves will be used than is compatible with a rise of two degrees centigrade in global temperatures in the long term.

Surely it is a failure of capitalism if it lulls us into assigning a value to these companies that can never in practice be realised? Well no, actually. It is instead a rational response to the absence of a proper global strategy to address the issue. Even if all the reserves can never be used without catastrophic consequences, those of any particular company may be exploitable. If no cap on the use is in prospect, there is no reason to limit arbitrarily what is taken into account in the company’s books.

This is a consequence of the well-attested economic concept of externality – costs which are borne by those other than the person who incurred them. The costs associated with climate change will be enormous. This winter’s British floods alone will have heavy costs, first to clean up the mess then to prevent more flooding. And that is just one small sliver of the worldwide costs to come. But these costs are not reflected in the prices paid by producers and users of the emissions that contribute to them.

Externalities create distortions, and the most effective way to deal with them is government intervention. Clean air legislation in cities is a classic example. The same principle should apply to climate change, whether through regulation (limiting emissions or requiring carbon capture and storage, for example) or taxation such as carbon taxes.

We don’t need a reinvention of capitalism. We need to harness the creative power of capitalism to tackle the problem. And the only way to do that is by action to change the relative returns of high and low carbon energy respectively.

Of course, it is easy to say that but much harder to achieve it in practice. The climate change deniers advance the ludicrous idea that it is all a dark conspiracy to impose stealth taxes and state control, rather than a rational economic response to a market failure. The politicians are in a state of wilful blindness, preferring to look away rather than confront the deniers and tell hard truths to electorates already complaining about high energy prices. Meanwhile atmospheric carbon dioxide concentrations relentlessly climb past 400 parts per million, the highest in our history as a species.

The British floods are a reminder of what is to come. There is too much nonsense spouted at both extremes of the debate. It is time for rational decision-making and above all for leadership.

--Richard Saunders is a non-executive director of InvestecAsset Management